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Developing Economies’ Long-Term Financing Shortfall

WASHINGTON, DC – Since the global financial crisis, “banking” has practically become a swear word. But, while banks undoubtedly have the capacity to inflict serious damage on economies and livelihoods, a well-run financial system can offer significant benefits. A growing body of evidence, highlighted in the World Bank Group’s recent Global Financial Development Report,shows that financial institutions and markets have a profound influence on economic development, poverty alleviation, and the stability of economies worldwide, and that a pragmatic assessment of the state’s role in finance is warranted.

On the surface, the most unusual feature of the ongoing financial crisis is that developed economies have been affected much more strongly and directly than developing economies, many of which have learned from previous crises, put their fiscal houses in order, made progress on structural reforms, and improved supervision and regulation.

But this distinction misses the larger point: the quality of policy matters much more than the level of economic development. Some financial systems in developed economies – for example, in Australia, Canada, and Singapore – have shown remarkable resilience, while others have gotten into trouble.

At the same time, the focus on financial reform in developed economies, while warranted, has contributed to complacency in developing economies. For example, many are facing their own version of the “too big to fail” problem – which the crisis reinforced – but have done little to address it.